Tag: globalization

Commercial Ties with India Are An Opportunity, Mr. President—Not A Problem

During his visit to India, President Obama should bury once and for all his divisive rhetoric about American companies shipping jobs overseas. Our growing commercial ties with India are a great opportunity, not a problem. U.S. exports to India have doubled in the past four years. American companies that have set up shop in India have helped to fuel demand in that country for U.S. products and services. The president should be celebrating rather than demonizing our deeper economic ties with India.

How President Obama Can Make His India Trip Meaningful

To make his coming visit to India meaningful, President Obama needs to combat the impression that India fares better with Republican presidents than Democratic ones, because the latter are instinctively more protectionist. In his quest for economic recovery, he has bashed US corporations that outsource jobs to places like India, forbidden companies getting government rescue funds from outsourcing work, and has now enacted higher visa fees for visiting IT professionals which seem designed to hit Indian companies quite specifically. This may be designed to win votes in the Congressional elections, but will not win hearts and minds in India. President Obama needs to state categorically that he will not follow the Great Depression formula of trying to combat unemployment with protectionism.

A better way to create US jobs will be to relax labyrinthine export licensing rules for exports of dual-technology equipment and technology (which can be used for both civilian and defense purposes). India also needs to do its bit by shedding its reputation as world champion in anti-dumping actions (206 in the five years to 2009).

The Bogus Charge of ‘Shipping Jobs Overseas’

In the final push before Election Day, President Obama has been traveling the country criticizing Republicans for favoring tax breaks for U.S. companies that supposedly ship U.S. jobs overseas. It’s a bogus charge that I dismantle in an op-ed in this morning’s New York Post:

The charge sounds logical: Under the US corporate tax code, US-based companies aren’t taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this “tax break” gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn’t want to impose higher taxes on those foreign operations is guilty of “shipping jobs overseas.”

In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That’s how they reach foreign customers with US-branded goods and services.

Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.

I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.

I unpack the issue at greater length in a Free Trade Bulletin published last year, and on pages 99-104 of my recent Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization.

Actually We Aren’t Running the World

Bloggers have already noted the most glaring problems with Arthur Brooks, Edwin Feulner and Bill Kristol’s Monday Wall Street Journal op-ed, “Peace Doesn’t Keep Itself,” which worries that conservatives are figuring out that trying to run the world is not conservative.

The op-ed pretends that the fact that defense spending isn’t the largest cause of the deficit means it isn’t a cause of the deficit. It obscures the fact that we spend more on defense than we did in the Cold War by counting the defense budget as a portion of the economy without noting the latter has grown faster than the former.

So I can limit myself to less obvious angles. The first is that neoconservatives like Kristol are for increasing the defense budget no matter what. For them the military is basically an expression of national awesomeness (to use an academic term). Enemies and other details, like what we spend already, come up mainly in the justification phase.

In 2000, when U.S. defense spending was nearly $180 billion lower than today—excluding the wars and adjusting for inflation—Bill Kristol and Robert Kagan wanted to increase defense spending by $60 to $100 billion a year. After September 11, they called for a “large” and “substantial” increase. Having got that and then some, Kristol, at least, wants even more. The neoconservative appetite for military spending is insatiable because their militarism is.

Second, I want to pick on one point the op-ed makes because it is both wrong and widely believed: “Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself.”

There are really two theories there. First, commerce requires general peace in supplier nations and military protection of supply lines. Second, only the United States can provide both. There is some evidence for these claims in a long-running correlation. Since World War II, U.S. military hegemony has coincided with explosive growth in global trade. So it’s easy to see how people assume causation. But as Chris Preble and I argue in the Policy Analysis that we just released, “Budgetary Savings from Military Restraint,” the causal logic here is weak. It overstates the U.S. military’s contribution to global stability and trade and the trouble that instability causes us.

The first theory is right in the sense that nations devastated by war ultimately lose purchasing power, which is bad for their trade partners. But in the meantime, warring countries typically need a lot of imports. They also generate capital for armies by selling goods abroad. For that reason, the Iranians and Iraqis kept pumping oil during their war. Wars do not simply shut down trade.

The argument for policing peacetime shipments is even worse, as I explain in a guest post I did yesterday for the Stimson Center’s revamped defense budget blog. As I note there, we do not really protect shipments now. A tiny minority get naval protection. Thus primacists tend to argue that what matters is not defending trade but the ability to do so, which deters malfeasants from harassing it or building capability to do so. But that argument gives the game away. You don’t need to do it in good times to do it in bad times.

What happens the day after we tell our Navy to stop sailing around in the name of protecting commerce? Who interrupts shipments? Would Iran start charging tolls at the Strait of Hormuz or China in the South China Sea? I say no because they know that we can force access and because there are plenty of ways to retaliate, including blockading those countries.

A more plausible claim is that some states would increase naval spending to police their own shipping. That seems like a good thing. Sometimes people say that such burden-sharing could set off a naval arms race that causes a war, say between India and China. I suppose that is possible, but naval arms races have caused few, if any, wars.

Let’s say our ability to buy some good from some area is cut off, either by instability at the source or en route. The likely outcome is supply adjustment, not supply failure. Generally another supplier takes the orders and prices adjust. That is particularly true as globalization links markets and increases supply options. It is when you have only one potential supplier that you really need to police delivery.

If you believe that military hegemony protects peacetime shipments, you could argue that it distorts price signals by shifting a portion of the good’s cost to federal taxes. Because I don’t believe that we are propping up prices in most cases, I say that what primacists are really selling is an attempted but failed subsidy to consumption of goods, including oil.

Oil is a special case because price shocks caused by supply disruption have in the past caused recessions. However, economists argue that the conditions that allowed for this problem have changed. One change is the reduced burden energy costs now impose on U.S. household income. Others disagree, but if they are right, that is why we have public and private reserves.

You can read more of what we think of about the idea that only we can keep the peace among states in the Policy Analysis or in the stuff Cato scholars have been pumping out for years. I will just say here that primacists ignore all the history contradicting the idea that only hegemons create a stable balance of power and the many rivals that formed stable balances of power without an hegemon taking a side.

International stability and world trade would be OK without our nation trying to use our military to provide them. If you don’t believe me, you might read one of these three papers by Eugene Gholz and Daryl Press. I took a lot of this from them.

Tufts Academic Gives Two Thumbs Down to Cheap Food

I suspect I may be falling into a publicity trap here, but nonetheless I am unable to resist blogging about an email I received this morning from the Global Development and Environment Institute at Tufts University.  The email contained this teaser:

How does cheap food contribute to global hunger?  GDAE’s Timothy A. Wise, in this recent article in Resurgence magazine, explains the contradictory nature of food and agriculture under globalization. He refers to globalization as “the cheapening of everything” and concludes:

“Some things just shouldn’t be cheapened. The market is very good at establishing the value of many things but it is not a good substitute for human values. Societies need to determine their own human values, not let the market do it for them. There are some essential things, such as our land and the life-sustaining foods it can produce, that should not be cheapened.”

This sort of stuff could only be written by someone on full academic tenure and who has never had to worry about feeding his family.

It would take many hours to rebut all of the idiocies contained in the full article, but for now I will just say: Yes, it is true that U.S. government subsidies for corn, for example, cause environmental damage in the Gulf of Mexico (Cato scholars have in fact covered this before as part of our ongoing campaign to eliminate farm subsidies). And yes, poor farmers abroad have suffered because of government intervention in food markets. But those are problems stemming from government intervention, not the free market.

Thursday Links

A Clash of Worldviews on Free Trade

If you want to witness the clash of two worldviews on trade, check out the online debate I’m having with Ian Fletcher of the U.S. Business and Industry Council. A self-described protectionist, Fletcher has written a new book with the unambiguous title, Free Trade Doesn’t Work: What Should Replace it and Why. In the opposite corner, I argue for eliminating barriers to trade, drawing on my own recent book, Mad about Trade: Why Main Street America Should Embrace Globalization.

The debate is being hosted by the International Economic Law and Policy Blog. We’ve already filed two 600-word posts each, with a third to come at the end of this week and concluding arguments early next week.